UK and International Tax news

Court of Appeal Finds For HMRC And Denies Recovery of VAT In Connection With Sale of Shares

Friday 31st May 2024

The Court of Appeal has allowed HMRC’s appeal in respect of the recovery of VAT charged on professional fees in connection with the sale of shares in a subsidiary company by the parent company.

In Hotel La Tour v HMRC, HMRC had disallowed HLT’s input tax claim for the period 09/17 and issued a corresponding assessment on the basis that the sale of shares was an exempt supply. HLT appealed on the basis that the relevant services were directly and immediately linked to HLT’s downstream taxable activities, in particular the subsidiary was sold to raise funds to develop a new hotel.

The subsidiary company was wholly owned by HLT which provided management services to it. As both companies were in a VAT group. HLT argued that the sale of shares should have been treated as outside the scope of VAT or, alternatively, as a sale of a going concern. The amount of VAT at stake was approximately £77,000.

The FTT held that the sale of shares was exempt rather than outside of the scope of VAT on the basis that although the VAT grouping provisions resulted in the management services being treated as outside the scope of VAT, the economic activity of the management services took place as a matter of fact.  In addition, the transaction did not have functional equivalence to a transfer of assets as a going concern because the relevant business in this context was carried on by the company that was sold rather than by the seller and transferred to the buyer.

Whilst the FTT decided that the sale of shares was exempt, following decisions by the Supreme Court in HMRC v Frank A Smart & Son Ltd and the CJEU in Skatteverket v AB SKF, it held that the VAT incurred when selling the shares could be recovered.

HMRC appealed to the UT which held that the FTT’s application of the principles to the facts of the appeal to be unimpeachable and dismissed the appeal. The UT was satisfied that there was a direct and immediate link between the costs incurred and the taxable hotel development activity the shares were sold to fund.

These decisions supported the view that where the purpose of any sale is to generate money to fund general overheads or specific taxable activities of the business making the sale and the costs incurred do not form a cost component of the selling price, the VAT treatment of the sale does not in itself prevent VAT from being recovered on the costs.

However, HMRC appealed to the Court of Appeal which unanimously allowed the appeal. All the judges agreed with Lady Justice Whipple who opined that HLT was prevented, by operation of the ordinary rules of VAT (and not displaced by the above referred cases or other authorities), from recovering input tax which had a direct and immediate link with HLT’s exempt supply of shares in HLTB.

If you would like more information on the above, please contact Keith Rushen on 0207 486 2378.

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